Inflation is above expectations, and it raises a question of what the Fed should be doing. Bloomberg News reports that the Consumer Price Index (CPI) rose 0.3% in September, compared to the 0.2% rise economists expected. And according to Reuters, the Producer Price Index (PPI) was up 1.1% -- way ahead of economists' projections of a 0.4% rise -- creating a tough problem for the Fed.
Will the Fed derive comfort from the core PPI figure, which was up 0.1%? It seems to pick numbers conveniently -- such as the 1.8% August rise in consumer inflation net of food and energy prices -- that give it comfort. Or will it view the 1.1% rise as another indicator -- along with the 4.1% rise in labor costs -- that inflation is out of control.
Why do we have a Fed anyway? Is it to bail out Wall Street through an unexpected 50 basis point rate cut? Or is it to keep inflation within a 1% to 2% range? I think the Fed is leaning towards bailing out financial markets rather than controlling inflation.
The Fed's loosening bias creates higher inflation. That's because it drives the dollar down as global investors punish the U.S. for its lack of fiscal discipline. And since oil is denominated in dollars, the immediate effect is to drive up oil prices, which are now in record territory at $88 a barrel. The rise in oil prices will be passed along to consumers in the form of higher gasoline and food prices.
And with the threat of Turkey invading Iraq and China retaliating against the U.S. for giving an award to the Dalai Lama, our dependence on foreign countries to pay our bills means the Fed is becoming increasingly irrelevant.
To protect yourself, you should buy stocks of companies that benefit from a weak dollar. Consider Korean steel manufacturer Posco (NYSE: PKX) which -- despite an 8.6% dip today in response to a plunge in the Indian market -- has risen 78.4% since I recommended it in my newsletter in February.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Posco.
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Reader Comments (Page 1 of 1)
10-17-2007 @ 10:28AM
Sarah said...
Don't you just love how the fed figures INFLATION without food and energy!